Dave Pollard's essays on politics & economics.

	Wednesday, March 4, 2009

Why Insurance Makes No Sense in a Natural Society One of the largest expenditures of the modern family in affluent nations is insurance: on our lives, our cars, our homes, our mortgages, our health, and our continued employment.  In struggling nations, and in 'uncivilized' cultures, there is no need for insurance. We look after each other, in community -- when one of us suffers a loss, the others take up the slack. Such communities and cultures 'self-insure'. The need to 'buy' insurance is one that has been created out of the loss of community. If we're not prepared to look after each other, then we need to look after ourselves, in isolation. If we can't do that, we have to buy a 'policy' that will compensate us, at least financially, when loss occurs. This ushers in huge insurance conglomerates who insure millions of people, so that the risk is spread and the insurance company can offer compensation without going bankrupt. But so much is lost in this sad transition: The insurance company needs to make a profit, so it charges us much more for insurance than it actually costs them. Based on greed and self-interest, the insurance company has an inherent motive to commit fraud -- to offer and charge people for insurance but then deny them compensation, using armies of lawyers writing mountains of small type to design policies that deprive the maximum number of people of the compensation they thought they were buying. The result is denied claims, cutting off 'high-risk' customers, and immense human misery. The hawking of insurance 'products' gives rise to another scourge: the insurance 'broker' or 'agent', an intermediary who skims off even more of our premiums for the 'service' of handling the selling and paperwork of the insurance companies. These intermediaries argue that they can find the best rates for customers, but as James Surowiecki has explained, they are in a blatant conflict of interest situation: they are compensated by the very institutions they are supposedly assessing to give us the best deal, so what they do is sell us the product that gives them the best deal. This they have in common with all agents, brokers and go-betweens (see chart above): they are just one more zero-value-added link in a fragile economy that features millions of people leeching off the very few who actually create products of real value. Although I think it is an overstated concern, with insurance from big anonymous corporations the issue of moral hazard emerges: if insurance 'covers' you, you may be more likely to engage in risky behaviour than if you have no insurance. If this is the case, the number of claims will inevitably rise, and the cost of insurance relative to the real risk of an insurable occurrence will be even higher. And when you get the worst of all zero-value-added intermediaries -- lawyers -- wading into the muck, encouraging people to sue insurance companies and the people they insure at no risk to themselves (the sleazy lawyer just takes 50% of what he can extort from his victim), the costs and abuses soar. So what's the answer? For health care it is unquestionably Universal Single Payer coverage. This is not really "insurance" at all -- it's an acknowledgement that a civil society should do its best to ensure all citizens have the right to competent health care. I'm absolutely opposed to two-tier health care systems that refuse to acknowledge this -- they pay for 'basic' health services but allow the rich to buy more extensive health services. If it's an essential, reasonably affordable health service, it should, I believe, be made available without charge to all who need it. If it's not essential, then it should not be provided by health care practitioners paid for out of the public purse; people who want it can buy it from unlicensed people on a caveat emptor basis. And if it's not affordable, it should not be available at all, at any price -- the idea that the rich should be able to buy a better quality of life than the poor is abhorrent. I know this idea is far too radical for most Americans, but that's because they've been so well brainwashed by the medical 'profession' and big pharma. This means, of course, price and salary caps for medical practitioners and medical products. How about other forms of insurance? Car and home insurance should work the same way: Universal Single Payer systems, so that if you're unfortunate enough to suffer a fire, theft or accident, you're made whole. What if it's your own fault? This is a tricky one. Are people who get sick more than others at fault because of their poor diet or lack of exercise, and should they be penalized accordingly? It's a slippery slope. I believe in no-fault programs. If someone breaks the law, they can be prosecuted. That's a separate issue from compensation for loss, no matter whose fault it is. Unemployment insurance is a cumbersome and expensive-to-administer system. A much better solution would be a negative income tax -- if your income falls below a certain level (I'd suggest 1.5 times the poverty level) you get a tax 'refund' to bring it up to that level, even if you haven't paid any tax. Life and mortgage insurance could be handled similarly. The purpose of life insurance is to protect the survivors (dependent family members, mortgage-holders, and co-workers who lose someone's essential skills). A negative income tax, and wealth taxes to reduce inequality in wealth and incomes, would eliminate the need for survivor benefits. I believe that, on death, asset ownership should revert to the community, to be held as common property and/or redistributed to poorer members (including, if they need it, the survivors of the deceased). This is a radical belief but one that makes a great deal of sense if you believe in equity and that we belong to the Earth, not the other way around. In a healthy natural community, no one is a 'dependent' on any one other person. If you can't pass on your wealth, the need for and purpose of life insurance disappears. I don't think people should get into debt in the first place, but my sense is that if someone wants to lend money to someone who later gets ill or dies, the debt should be extinguished. Businesses take risks all the time -- on commodity prices, employees, market demand -- lenders should just write off debts that can't reasonably be repaid because of circumstances beyond anyone's control. This would eliminate the need for 'mortgage insurance' to protect against eviction under such circumstances. It would of course also reduce the number of risky loans and mortgages, preventing people from getting into debts they are unlikely to be able to repay -- I think that would be a good thing. If one business wants to 'insure' (bet against) something happening, and 'buy' that risk from another, then that's a risk both parties have agreed to take -- one will win, and the other lose. This is what happens in hedging and many other business activities. The winner's profits are of course taxable. So, to recap: a better solution for health insurance is Universal Single Payer health coverage a better solution for home and car insurance is Universal Single Payer no-fault loss coverage a better solution for unemployment insurance is a negative income tax a better solution for life insurance is a negative income tax and a 100% estate and excess wealth tax a better solution for mortgage insurance is to transfer all risks of default for reasons beyond the mortgagee's control, to the mortgagor These alternatives to insurance are effectively an emulation of the way people take care of each other in times of loss or hardship in natural communities. If you feel obliged to buy insurance today, it's because the corporatists, the lawyers, the big industry oligopolies, and the brokers and agents have conspired to rip us off, with a system that is massively expensive, mostly heartless, grossly inefficient, and designed to perpetuate inequity of wealth, income, and all that money can buy. So if you instinctively grind your teeth when you write out your insurance cheque, now you know why. Category: Understanding Economics 11:51:15 PM  trackback []  comment []

© Copyright 2009 Dave Pollard. Last update: 4/25/09; 10:05:02 AM.